New Jersey’s Funding Solution May be Revenue-Neutral, but it makes Awful Transportation Policy

Earlier this week, New Jersey’s gas tax increased 23 cents from 14.5 cents to 37.5 cents. The increase raised New Jersey’s gas tax from 49th highest in the nation to 6th. The actual gas tax increase was mitigated by elimination of the estate tax and a cut in the sales tax. But from a policy perspective, New Jersey’s effort to find new revenue was among the worst undertaken in the last 5 years.

The best change the bill made was introducing an amendment to constitutionally guarantee that all gas tax revenue funds transportation purposes ONLY. In the past the Christie administration has used gas tax revenue to balance the general budget. This is a violation of the users-pay/users-benefit trust fund that transportation policy is based on and should NEVER occur. New Jersey residents are strongly encouraged to vote for the amendment.

In exchange for increasing the gas tax by 23 cents, the package includes five different tax cuts or breaks. First, the package eliminates the estate tax completely by January 1, 2018. Second, it lowers the sales tax from 7 cents on the dollar to 6.625 cents or about 5 percent.

Third, the package allows retirees to pay significantly less in state income taxes. Currently, married retirees filing jointly do not owe taxes on the first $20,000 a year in retirement income. The threshold will increase $20,000 per year through 2020 until it stands at $100,000. The cap on single retirees increases from $15,000 to $75,000.

Fourth, it increases a tax credit for the working poor. The state earned income tax credit increases from 30-35 percent of the federal level. Finally, it provides a tax break for veterans. The tax deduction of $3,000 applies to all veterans as long as they were honorably discharged from the U.S. Armed Forces of the New Jersey National Guard.

There may be some additional cuts when the Legislature meets in 2017. Assembly members and Senators have discussed providing tax rebates for purchased gasoline and decreasing the sales tax further. While between 2017-2022 the package will increase taxes by $800 million-$1 billion, over the long-term the package actually decreases revenue. By fiscal year 2022, the gas tax increase will total $1.23 billion but the tax cuts will total $1.40 to $1.44 billion.

So what’s not to like in a package that increases transportation funding while actually reducing taxes?

One problem is that making policy by engaging in endless horse-trading and last minute deals does not produce the best results. An estate tax cut makes sense, but was a cut for military veterans the best idea? In politics, grand bargains are inevitable but each of the tax changes should have been evaluated on its own grounds. It is likely that the Legislature could have cut just as much or more in taxes through a coordinated series of cuts that actually helps the economy.

And the bigger problem is not in the final numbers; the problem is that the tax increase did not address any of New Jersey’s bad transportation policies.

The gas tax is a good choice to fund transportation projects. However, like a rockstar making its farewell tour, the gas tax’s time as a functioning funding source is nearing its end. New Jersey should have considered a mileage based user fee trial. Mileage based user fees, which charge drivers based on how many miles they travel, are considered to be the successor to the gas tax. Many states and compacts of states such as Oregon and the I-95 Corridor Coalition (that New Jersey is a member of) are using federal grants to test MBUFs. But New Jersey’s seems stuck with yesterday’s technology.

If the state wasn’t ready for mileage based user fees, it could have taken steps to extend the gas tax’s viability. Some states have indexed the gas tax to inflation or fuel economy standards or both. This ensures that gas tax revenues will remain sufficient until the state switches to mileage based user fees.

Instead the bill includes a zany provision that ensures New Jersey raises the amount of funding equivalent to the total that 23 cents per gallon would have produced in the 2016 fiscal year that ended June 30. So if gas consumption increases, the tax rate will decrease. And if consumption decreases, the tax rate will increase. This provision dilutes the users-pay principle because gas taxes will vary for reasons outside of the driver’s control. Over the long-term, with the proliferation of electric and hybrid vehicles, consumption is likely to go down and the tax up.

Additionally, the state did nothing to address the problem of gas tax fairness. Several states, such as Georgia, have implemented an electric car fee of up to $200 to ensure electric vehicles pay for the infrastructure they use. Many states have implemented a truck registration fee or truck weight fee, since trucks wear out roads 10-1,000 times more quickly than roads do, yet pay less than twice as much in gas taxes. Both of these proposals would have been easy to implement, yet neither was considered.

But the problems extend beyond the revenue source mechanisms to the state’s limitations to innovative financing sources. Innovative financing can help stretch limited funds further. The bill could have enabled design-build projects public-private partnerships. Design-build contracts combine two of the elements of building highways to speed construction and reduce costs. Public-private partnerships are partnerships between the government and private sector in which the skills and assets of each sector (public and private) are shared in delivering a service or facility for the use of the general public. Both methods lead to cost savings, often of 20 percent or more. Today, more than 40 states use design-build contracts and more than 30 use public-private partnerships.

Another problem in New Jersey is the political influence on project selection. To reduce this problem, the bill could have prioritized state of good repair. Modern DOTs prioritize improving the condition of its roadways before spending money on new construction, either roadway or transit. New ribbon cuttings are sexy but maintaining a high quality road network is the bread and butter of 21st century Departments of Transportation.

Many states, including North Carolina and Virginia, use technical criteria such as population growth, congestion and road safety, to focus transportation spending on the most critical parts of the system. States that do not have such systems, such as New Jersey, tend to build unnecessary white elephant projects, both highways and transit. These technical criteria force the DOT to make tough decisions between necessary and nice-to-have projects. This merit-based process has proven the best way to eliminate political influence in the transportation project selection process. NJDOT claims it has such a system, but if so the merit-based criteria need to be improved.

Finally, the bill does nothing to address mismanagement and high employee costs. One of the reasons that the state needed a gas tax increase was because it lived beyond its means. For years, New Jersey’s DOT would fund projects by taking out bonds. But the DOT was slow to repay this debt. By 2012, the state spent all of its gas tax revenue paying back bonds and still couldn’t satisfy its debt obligations. Most state DOTs are restricted in the percentage of debt they can take out and such a restriction should have been added to NJDOT as well.

New Jersey transit sucks up a significant percentage of the state’s gas tax. The number varies from year to year making it challenging for both the highways division and the transit folks to plan projects. The bill should have insisted on a cap on the funds transferred, encouraging New Jersey transit to make better use of transit oriented development, increase rush hour ticket prices to raise farebox recovery rates and improve efficiencies. With out setting an actual level, New Jersey Transit has no incentive to make improvements. Worse, the agency can legitimately argue that it cannot plan for the future because it is funding depends on the political whims of Trenton.

The state also has very high employee costs. Unionized workforces, like New Jersey’s, are typically higher paying. New Jersey has many workers earning more than $70,000 and some earning more than $100,000 per year. The average New Jersey per capita income is $36,000. Since this bill will lead to steadier employment for the construction sector, the union could have offered some concessions in either salary or scheduling. Yet that was not even a topic of discussion.

From a financial perspective, the bill is a positive. It actually reduces taxes over the long-term. But from a policy perspective, New Jersey is stuck in reverse.